American Lighting Product (ALP) is a leading manufacturing company of fluorescent lamps. ALP is producing a variety of lamps and selling them in the USA and European markets. The production line of the company has more than 700 products in three major sale channels, which are commercial and industrial, consumer, and original equipment manufacturers.
Critical Issue
The critical issue of the business is to maintain a higher inventory that has affected the overall profitability of the company. The company’s management has decided to reduce inventory levels to enhance the cash flow. However, fluctuation in demand for products increased the risk of meeting the customer’s expectations.
Critical facts
ALP is maintaining a high inventory that increases the inventory cost and affects the working capital. Account receivables are slow, which creates potential problems in the routine operations of the business.
Analysis
ALP has revised its strategy regarding inventory and introduced a first-time delivery rate that refers to the stock produced according to the proportion of the customer’s order. The inventory is to be produced at the exact time of delivery. This is also known as the just-in-time strategy adopted by many businesses. This approach is highly successful, and it reduces the cost of inventory stored in the warehouse. There are some risks associated with this process, such as the on-time supply of raw materials from the suppliers and proper planning of production to meet the orders of each customer. It is a challenge to meet the customer’s expectations. Customers expect on-time delivery of their orders; however, errors in demand forecasting create many problems. If the actual demand is higher than the forecasted demand, then the company may lose its customers. At the same time, the higher actual demand will increase the inventory cost and disturbs the working capital of the company.
Recommendations
ALP management should reduce the number of MDCs to reduce inventory costs. The cost of inventory per unit is $0.10, if it is removed, the warehousing cost of the entire system will be reduced. The first-time delivery rate should be implemented to avoid unnecessary inventory costs. ALP has to consolidate the consumer products in one warehouse and distribute it to different locations.